Question

Identifying Relevant Costs and Revenues
The Village of Bomont operates a power plant on a river that flows through town. The village uses some of this generated electricity to operate a water treatment plant and sells the excess electricity to a local utility. The city council is evaluating two alternative proposals:

• Proposal A calls for replacing the generators used in the plant with more efficient generators that will produce more electricity and have lower operating costs. The salvage value of the old generators is higher than their removal cost.

• Proposal B calls for raising the level of the dam to retain more water for generating power and increasing the force of water flowing through the dam. This will significantly increase the amount of electricity generated by the plant. Operating costs will not be affected.

Required
Presented are a number of cost and revenue items. Indicate in the appropriate columns whether each item is relevant or irrelevant to proposals A and B.

		Proposal A	Proposal B
1.	Cost of new furniture for the city manager's office
2.	Cost of old generators
3.	Cost of new generators
4.	Operating cost of old generators
5.	Operating cost of new generators
6.	The police chief's salary
7.	Depreciation on old generators
8.	Salvage value of old generators
9.	Removal cost of old generators
10.	Cost of raising dam
11.	Maintenance costs of water plant
12.	Revenues from sale of electricity

Answer 1

Answer:

	Proposal A	Proposal B	Explanation
1.	Cost of new furniture for City Manager’s office	N/A	N/A	There is no cost associated with building the office furniture
2.	Cost of old generators	X	N/A	It is the cost associated with proposal A as in the second proposal they are increasing the level of dam not the replacement of generators
3.	Cost of new generators	X	N/A	Since in proposal A they are replacing the generators so this is the cost associated with proposal A
4.	Operating cost of old generators	N/A	X	As in proposal A the old generators are replacing with the new one there would not be any operating cost associated with proposal A but in proposal B it would be there
5.	Operating cost of new generators	X	N/A	As in proposal A the old generators are replacing with the new one there would operating cost associated with proposal A but not in proposal B.
6.	Police Chief’s salary	N/A	N/A	No cost
7.	Depreciation on old generators	X	X	It would be there in case of both the proposals as in Proposal A it is required to find the current book value of the generators and to find the capital gain or loss. For B it is to record the book value of the generators
8.	Salvage value of old generators	X	X	It is used in both to calculate the depreciation for the generators
9.	Removal cost of old generators	X	N/A	In proposal A since it is getting replaced with the new one.
10.	Cost of raising dam	N/A	X	In proposal B since they are planning to raise the water level of the dam not the replacement of the generators
11.	Maintenance costs of water plant	X	X	In both since this is the cost associated with the plant. It would incur no matter which proposal they choose
12.	Revenues from sale of electricity	X	X	in both as this would help in determining the total revenue generated by the plant, no matter which proposal in chosen.